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You are the chief financial officer of a large multinational company; and six months from now you will be receiving a settlement payment of $50 million, which you plan to invest in 10-year U.S. Treasury bonds. Your interest rate forecast indicates that the yield curve will drop dramatically in the next two quarters. You are considering ways that you can guard against the possible decline in interest rates before you have the funds available to invest.
a. Briefly describe the hedging strategy using the 10-year Treasury note futures contract that would provide the best protection against this possible decline in yields.
b. Suppose that six months after you have entered into a futures contract as suggested in Part a, interest rates increases in the market actually increase substantially due to an unexpected change in monetary policy. Discuss how this increase in interest rates will affect the futures position you entered into.
c. Discuss whether you would have been better off (1) with the hedge position or (2) without the hedge position in this situation
Winnebagel Corp. currently sells 29,600 motor homes per year at $81,000 each and 8,600 luxury motor coaches per year at $123,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 24,600 of these..
Two investments, C and D are being evaluated. They are mutually exclusive. Investment C has a higher NPV using any discount rate between zero and 9%, while D has a higher NPV using any discount rate between 9.1% and 15%. Which investment do you recom..
Quiver Archery's bond currently is selling for $1,065; its value one year ago was $990. The bond has a $1,000 maturity value and a coupon rate equal to 7 percent, and it matures in eight years. Interest is paid annually. Compute (a) the current yield..
Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. What is the difference in the percentage of the firm's..
Assume a financial system has a monetary base of $25 million. The required reserves ratio is 10 percent and there are no leakages in the system. What is the size of the money multiplier? What will be the system’s money supply?
The 6-month zero rate is 8% with semiannual compounding. The price of a 1-year bond that provides a coupon of 12% per annum semiannually is 95. What is the 1-year continuously compounded zero rate?
We are evaluating a project that costs $573,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 75,000 units per year. Price per unit is $46, varia..
Marichal Motors is considering an investment in a proposed project. Rather than making the investment today, the company wants to wait a year to collect additional information about the project. If Marichal waits a year, it will not have to invest an..
What is a financial market? How are financial markets differentiated from markets for physical assets? Differentiate between money markets and capital markets.
The cost of the machine is $300,000, machine installation cost of $15,000 and transportation cost of $5,000. It has four year life. At the end of four years, the firm expects to sell the machine for $35,000. The firm uses the straight line method of ..
You own a small manufacturing plant that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, a..
J.B. Corporation is considering the purchase of equipment that has an invoice price of $450,000. The equipment was recommended by a consulting firm that did an analysis for J. B. Corporation. J. B. paid the consulting firm $12,000 for its report. Cal..
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